Readability of Annual Reports and Operating Performance of Indian Banking Companies

Abstract

Existing literature focuses on the evaluation of the readability of annual reports of non-banking companies. However, banking companies’ opaque nature and a double motivation to abuse accounting discretion requires a separate study on the readability of banks’ annual reports in association with their performance. We, therefore, attempt to explore firm performance and readability of banking firms’ annual reports in India. Net interest margin (NIM) and Fog Index are used as performance and readability variables respectively. We find that management discussion and analysis (MD&A) of the Indian banks is difficult to read. However, when we compare it with existing literature, Indian banks’ MD&A is difficult but not unreadable. Panel data regression analysis shows that firm performance would have a negative impact on the Fog Index. Further analysis of good and weak performing banking firms shows that the effect of NIM on Fog Index is higher in the case of weak performing banks. Empirical results affirm that firms with weak performance would structure their annual reports to veil adverse information in unfavourable situations. Consistent with the opaque nature of banks and incomplete revelation, managers of banks make MD&A harder to read to cover up the causes of weak performance. Application of readability index in case of banking companies in an emerging economy in association with performance is the contribution of this paper. An assessment of the readability of annual reports is an interesting topic for research to better understand the recent negative developments in Indian banking industry such as high non-performing assets, continuously declining return on assets, sharp increase in banking frauds and poor governance.

Readability of integrated reports: Evidence from worldwide adopters

“…Furthermore, they underlined the existence of a positive relationship between CSR performance and the level of readability. Jayasree and Shette (2021) found that the section “Management discussion and analysis” of the annual reports of Indian banks is difficult to read. They also found a negative influence of financial performance on the level of readability.…”

The effect of MD&A disclosures on corporate performance: a panel quantile regression analysis

“…Therefore, protects the interests of the shareholders and serves as the best means of communication which improves the relationship between the managers and the stakeholders. Better the agent-principal relationship, decreasing agency cost, hence increasing the firm profitability (Bryan, 1997;Brown and Tucker, 2011;Cole and Jones, 2014;Jayasree and Shette, 2020). However, in certain studies, the relationship is found negative because managers use an impression management strategy to attract potential investors and avoid any questions from the existing shareholders.…”

تأثير مدى تعقد التقارير المالية على الأداء المالي المحاسبي والاقتصادي اللاحق: دراسة تطبيقية

“…‫المالية؛‬ ‫تقاريرها‬ ‫تعقد‬ ‫ومدى‬ ‫للمنشأة‬ ‫المالي‬ ‫األداء‬ ‫بين‬ ‫عكسية‬ ‫عالقة‬ ‫وجود‬ ‫إلى‬ ‫الدراسات‬ ‫تلك‬ ‫غالبية‬ ‫توصلت‬ ‫وقد‬ ‫هذا،‬ ‫القوي‬ ‫المالي‬ ‫األداء‬ ‫ذات‬ ‫المنشأة‬ ‫من‬ ‫ًا‬ ‫تعقد‬ ‫أكثر‬ ‫تقارير‬ ‫تصدر‬ ‫الضعيف‬ ‫المالي‬ ‫األداء‬ ‫ذات‬ ‫المنشأة‬ ‫أن‬ ‫أي‬ (Subramanian, Insley, & Blackwell, 1993;Smith & Taffler, 2000;Li, 2008;Bloomfield, 2008;Hrasky & Smith, 2008;Smith, Dong, & Ren, 2011;Dempsey, Harrison, Luchtenberg, & Seiler, 2012;Abdul Rahman, 2014;Lo, Ramos, & Rogo, 2017;Asay, Libby, & Rennekamp, 2018;Hassan, Abba s, & Garas, 2019;Gu & Dodoo, 2020;Jayasree & Shette , 2021) . (Courtis, 1995;Sydserff & Weetman, 2002;Rutherford, 2003;Smith, Jamil, & Johari, 2006;Prince, 2017;Soepriyanto, Tjokroaminoto, & Zudana, 2021) .…”

“…‫فقد‬ ‫السابق،‬ ‫االدعاء‬ ‫مع‬ ‫ا‬ ً ‫واتساق‬ ‫قدمت‬ ‫اإلف‬ ‫أن‬ ‫على‬ ً ‫دليال‬ ‫الحديثة‬ ‫األدبيات‬ ‫بعض‬ ‫المعقدة‬ ‫السردية‬ ‫المحاسبية‬ ‫صاحات‬ ‫المنشأة‬ ‫بأرباح‬ ‫ًا‬ ‫سلب‬ ‫األحوال‬ ‫أغلب‬ ‫في‬ ‫ترتبط‬ (Davies, 2007;Souza, Rissatti, Rover, & Borba, 2019;The Association of Chartered Certified Accountants, 2009;Mutiso & Kamau, 2013;Oberholster, Koornhof, & Vorster, 2015;Sukotjo & Soenarno, 2018) . (Subramanian, Insley, & Blackwell, 1993;Courtis, 1995;Smith & Taffler, 2000;Sydserff & Weetman, 2002;Rutherford, 2003;Smith, Jamil, & Johari, 2006;Li, 2008;Bloomfield, 2008;Hrasky & Smith, 2008;Smith, Dong, & Ren, 2011;Dempsey, Harrison, Luchtenberg, & Seiler, 2012;Abdul Rahman, 2014;Lo, Ramos, & Rogo, 2017;Prince, 2017;Asay, Libby, & Rennekamp, 2018;Hassan, Abbas, & Garas, 2019;Gu & Dodoo, 2020;Jayasree & Shette , 2021;Soepriyanto, Tjokroaminoto, & Zudana, 2021) .…”